It’s hard to believe that over a year has gone by since the Tax Cuts and Jobs Act (TCJA) of 2017 was passed by Congress as one the most comprehensive changes to US taxation in over 30 years. The carried interest safe harbor, interest expense limitation and the corporate tax rate reduction are three of the most significant ways that the Tax Act has impacted private equity funds, their management companies and their portfolio companies.
Despite the controversial carried interest loophole, the TCJA only increased the holding period required for long-term tax treatment to greater than three years. If the holding period is less than three years, then the gain will be taxed as short-term capital gain (versus ordinary income), which tops out at ordinary rates of 37%. Additionally, the TCJA provides that if there is a transfer of a partner’s carried interest to a related party, then the partner’s entire interest will be characterized as short-term capital gain even if the holding period is greater than three years. Most private equity investments are held greater than 3 years, however, partners should be aware of add-ons that do not qualify for the three-year holding period or transfers to related parties.
Should you have questions about these provisions of the TCJA, structuring opportunities or any other matter affecting businesses in the private equity segment, contact Raygan Evans or Laurie Bizzell by calling 770-396-2200.